Barney's New York? A boutique on Rodeo Drive? Nope, Target Corp., the nation's No. 3 discounter, behind Wal-Mart and Kmart. In a bid to further distance itself from rivals, lure shoppers from other retailers, and capture higher profits, Target is stepping up its partnerships with designers. What started in 1999 as a quirky line of housewares by architect Michael Graves is quickly becoming a stable of designer-related products, ranging from glitzy makeup and trendy clothes to home furnishings and camping goods. "This provides Target a clear point of differentiation," says Solomon Smith Barney analyst Richard Church.
DEALS GALORE. Taking advantage of a weak economy and Kmart's recent bankruptcy-protection filing, the Minneapolis-based retailer's strategy seems like a smart bet so far. In September, Target announced a deal with fashion designer Todd Oldham, who'll design a line of home furnishings that will appear in Target stores this summer. Under the terms of the December agreement with Ecko, the ubiquitous retailer this summer will start selling his Physical Science brand of casual clothes to young men and boys. And Sprouse will design a flag-splashed collection of clothing and accessories for men, women, and kids that will debut this July 4.
Neither Target nor designer Rowley's spokespeople will confirm their talks, although this is a hot topic in the New York fashion community. A Target spokeswoman says: "We're always looking for designers that will wow the masses."
Target has long sought a position as a slightly higher-end discounter than Wal-Mart or Kmart, with cleaner and better-lighted stores. But in the second half of the 1990s, as it began to expand into the New York area and other parts of the Northeast, it has honed its brand to mean cheap chic. That has included whimsical advertising campaigns -- including spreads in such unlikely places for a discounter as The New York Times Magazine.
BEYOND MARTHA. While rival Kmart also went down a similar path with a Martha Stewart line of home furnishings, Target's strategy involves a whole range of designers. After Graves came Target's partnership with Mossimo Giannulli, a youth designer whose star had faded but then came back through his exclusive association with Target. Next came a line of beauty products from makeup artist Sonia Kashuk. Last year, it made another higher-end alliance, launching a line of camping goods under the Eddie Bauer brand name.
A product line with architect Philippe Starck is also planned, but Target won't give details. Furthermore, the retailer has done a better job than Kmart of integrating all its designer brands through marketing and store layout so that they add to Target's cachet.
Even with the recession, Target's timing couldn't be better, says Marshal Cohen, president of NPD Fashion World, a research firm that tracks apparel sales. Target's more upscale marketing and product message appeals to shoppers at a time when they're more willing to trade down to save money. Cohen says this is helping Target take sales from slightly higher-end retail categories, such as department stores and specialty stores. Indeed, it's no accident that Target is quietly opening more stores in regional malls, the turf once ruled by both these rivals.
NO "STIGMA." Target's more upscale image helps attract higher-income shoppers like Lori Hardwick, a 33-year-old Chicago investment banker, who says she doesn't like to shop Wal-Mart or Kmart. "When I go to those stores, I feel like I am going down a notch," she says during a recent visit to a Chicago Target to buy clothes for her two children. "There isn't that stigma with Target."
Target is also aiming its designer strategy at the youth market, says Jeffrey Klinefelter, an analyst at US Bancorp Piper Jaffray. Emboldened by its success with Mossimo, Target's deals with Ecko and Sprouse are with designers who still have an edge and resonate with the young. Sprouse has designed clothes for rock stars.
There's good reason for trying to attract the younger demographic: 12- to 19-year-olds are the fastest growing segment of the population and a powerful economic force, spending $172 billion last year, according to consulting firm Teenage Research Unlimited. "They will also grow up as Target shoppers," Klinefelter adds.
"MORE COOL." With the weak economy, teens, too, are more inclined to shop at a discounter, says NPD's Cohen. Eying a $24.99 pair of Mossimo jeans on a recent trip to a Chicago Target, 17-year-old Danielle Daker says she can nearly buy two pairs for the price of one at specialty stores such as Gap or Express. Besides, she says, "The Mossimo label is more cool than Gap." The shift of younger shoppers toward the discount channel is also reflected in broader numbers: Apparel sales to 13- to 17-year-olds rose by 14.7% last year at discounters, compared to flat sales at department and specialty stores, according to NPD.
By positioning itself as a trendier retailer and offering designer goods other sellers don't have, Target differentiates itself from its toughest rival -- Wal-Mart. In fact, Kmart's effort to match its prices with superefficient Wal-Mart helped push it into bankruptcy protection.
Having more unique merchandise to attract shoppers allows Target to evade this trap and price everyday items at a price that's three to five percentage points higher, Merrill Lynch estimates. This has helped overall profits. Securities firm Legg Mason Wood Walker estimates that Target's operating profit as a percent of sales rose last fiscal year to 7%, from 6.8% the year before. (Target will report fourth-quarter and annual results on Feb. 28.) Wal-Mart's operating margin declined to 5.5%, from 6%, as it expanded sales of lower-price grocery items.
EASY TO MISJUDGE. Alliances with designers is also a strategy that's difficult for Wal-Mart to follow. Target's cachet as a style-conscious discounter gives it an advantage in teaming up with higher-end designers, who might not want to be associated Wal-mart. "The aesthetic is very much different," says Ecko's spokesman, Artus Conception. "When you walk into Target, it feels like a fashion house."
Still, Target faces several risks. Fashion is far more treacherous because it's easy to misjudge what consumers want. Some analysts wonder if this strategy could ultimately make Target's business more volatile. As it expands its designer lines, the retailer's earnings will face more exposure to fashion missteps, notes UBS analyst Linda Kristiansen.
Target also aims at a broad audience in terms of age and income, which is a far more challenging prospect when it comes to fashion. Consider Gap's Old Navy unit, which was once considered quite trendy but now is regarded by much of its audience as old hat. So far, Target has gotten it right, but not long ago Old Navy could do no wrong, either. The key will be whether the retailer can continue to answer the question: What's hip? By Robert Berner in Chicago